Insight Series: Can Insurers Lead Business into the Ecosystem Marketplace?

May 14, 2010
By admin

By Steve Zwick and Henry Teitelbaum

When the ocean degrades, everyone loses – and that includes fishermen who lose their catch, ocean-side properties that lose their protection, and tourism operators who lose their tourists. The private sector,therefore, has much at stake – and should be scrambling for ways to head off disaster. That’s not happening, however. Is the problem the message – or the messenger?

*All of the people quoted in this article spoke at the 16th Katoomba Meeting in Palo Alto, California.  Their presentations can be heard in their entirety at: http://www.ecosystemmarketplace.com/pages/dynamic/article.page.php?page_id=7439&section=home

8 May 2010 Economies grow by turning raw materials into higher-value products – but often in ways that fail to replenish those materials.  By ignoring the economic value of the ecology upon which they depend, economies thus often sow the seeds of their own destruction.

Marea Hatziolos believes we can reverse that trend by recognizing nature’s economic value and turning nature into a profit center – which, not coincidentally, is also the core premise of schemes that promote payments for ecosystem services (PES).

“We are talking about natural arrangements between a provider of a service and a recipient or beneficiary of a service,” says Hatziolos, a marine ecologist and senior coastal and marine specialist in the Environment Department of the World Bank.

“Who better to help us do that than the private sector?” she asked in February, at the Fifteenth Katoomba Meeting, which was held in the US city of Palo Alto.  “After all, most of their goals have to do with profits.”

Al Appleton agrees. The former head of New York City’s water, sewage, and environmental protection operations, he helped initiate parts of the city’s landmark watershed agreement that pays farmers in the surrounding Catskill Mountains to protect the watershed – a scheme that has saved the city billions in filtration costs over the years.
Despite its success – and despite the efficacy of demonstration projects across the United States – that scheme remains one of the few payments for watershed services projects delivering results on a large-scale. That, says Appleton, is because a successful project requires more than intelligent market models if businessmen are going to get involved.

For one, he says, successful projects need scale if they are to become interesting for businesses. For another, he adds, the public and non-profit sectors need to understand the entrepreneurial mentality by which business people operate.

“You people who are on the cutting edge of environmental economics… need to really get much more involved in creating a climate of opinion that makes ecosystem services proposals more attractive,” he said, adding that a similar awareness of the needs of elected officials must also be taken into account when designing solutions to specific ecosystem challenges.

“Politicians hate incrementalism,” he says, because of the risk that the projects either won’t solve the problem or will do so in a timeframe that won’t justify their investment of political capital. With these stakeholder considerations in mind, Appleton says that as efforts to take on the challenge of creating deep ocean ecosystem markets gather momentum in addressing issues related to acidity, temperature, nitrogen runoff, plastic waste, pirate fishing or fish farming, it’s strategically very important to think big and to “hit the first targets with care” so as to build credibility for further attempts at creating ecosystem markets.

Speaking at the same event, Forest Trends MARES Program Manager Winnie Lau said it is critical to develop a range of voluntary market-based mechanisms, notably through the Payment for Ecosystem Services model, but also through water quality services, ocean zoning, marine spatial planning, and leasing activities to attract private financing for sustainable coastline and ocean resource management. To do this effectively, she says the private sector needs to forge closer partnerships with communities, with governments, and with regulators as well as with existing terrestrial ecosystem service providers.

The Externality Quandary and the Need for Legal Drivers

Ricardo Bayon, of EKO Asset Management Partners (and co-founder of Ecosystem Marketplace), reminded MARES participants that ecosystem markets, far from being a product of free enterprise and private sector innovation, are fundamentally reliant upon governments and government-sponsored regulation for their creation. This is particularly true of wetlands, which do not produce readily identifiable products of interest to consumers or industry, but are nevertheless essential habitats for fish and the preservation of coastline.

“Nobody wakes up in the morning wanting a bowl of wetlands,” he says, citing a friend from the wetlands mitigation banking sector, so “most of these markets are in fact created by governments and by rules set up by governments” to achieve policy goals.

Albert Cho of Cisco Systems says laws don’t just provide a whip to markets’ carrot – they provide clear rules upon which all participants can rely. This regulatory certainty reduces market risk and creates consensus around how to incentivize private-sector risk-taking, and in aligning the design of the market with long-term political goals.

Science and Technology: the Sharpening Saw

Science, technology and our understanding of marine ecosystems and their connectivity to terrestrial and wetlands ecosystems have made enormous advances in recent years. This has opened up opportunities to measure with an improving degree of accuracy the inter-relationships that exist between them. Peter Mumby of the University of Exeter says this has significant implications for the creation of new ecosystem services because the increasing reliability of sonar and satellite mapping makes it easier to determine the impact of a service and to choose where it is most likely to be effective.

“Mapping can help determine the value of a particular mangrove or reef for maintaining ecosystems,” he says, making it possible to more precisely estimate the survivorship of fish that rely on the former to reach a level of maturity that is optimal for survival on the latter.

Besides the implications for fisheries, the ability to predict differences in biomass that result from the protection or restoration of particular ecosystems and coastal habitat has implications for a host of private sector stakeholders. These include those who have interests in making carbon sequestration mappable, in improving coastal defenses against storms and erosion, in selecting building materials or in promoting tourism.

Mumby noted, as an example, how the potential for coastal marine ecosystem services to shore up terrestrial coastlines should enable coordination with the insurance industry in making solutions more effective as well as in scaling them up.

Insurers Lead the Way

As more speakers took the stand, it became clear that some segments are taking action while others aren’t – and insurers are among the leaders.  That makes sense, because they deal with risk on a daily basis, says Adam Cole, who is General Counsel for the California Department of Insurance.  He said that insurers already engage in a form of PES when they offer lower premiums for environmentally responsible clients and charge higher premiums for clients whose environmental policies introduce an element of risk into the company’s bottom line.

Under California law, however, that adjustment must be offered based on risk, and not on environmental benefit alone.

“I can’t let them give a discount unless there’s a correlation to risk,” he says, adding that governments can play a role in clarifying that risk by clarifying liabilities. “If laws are passed, you create liabilities, you create risk, and you’ve then created the circumstances for the insurance company to kick in.”

Insurers are thus among the leaders in pushing for laws that clearly define liability – both so they can write policies, and so they can protect themselves.

PES Along the Coast

“Katrina alone cost the insurance agency in the United States $20 billion dollars,” said Stephen Bushnell of Fireman’s Fund Insurance Company, who also spoke at Katoomba XV. “Munich Re estimates that the amount that the insurance industry has paid out for catastrophes has risen sevenfold since the 1960s.”

German insurer Allianz, he adds, is projecting a fifteenfold increase in weather-related losses over the next 30 years – due to a double-whammy of growing coastal development and rougher weather from climate-driven storms.

That’s led Allianz to create new risk models that combine future development plans with climate projections (and their accompanying hurricane projections) to estimate the amount of damage that insurers could get stuck with if the big one hits.

“We then use that to decide if we want to write more insurance in that area and what price we should charge,” he says. “Every time these models are recast, they tell us the storms are going to be more severe, our losses are going to be larger.”

From Reactive to Proactive

Allianz responded by creating the Allianz Climate Change Center of Confidence, which is now creating new insurance products that, in part, adjust premiums based on a company’s liability – which, in  turn, is based on its environmental stewardship.

Fireman’s Fund plans to offer discounts for LEED-Certified buildings – and not because they’re being green.

“We’ve been able to justify to insurance departments that there is that reduction in risk with LEED Ceritification and the risks the losses that we’ve paid,” says Bushnell, adding that the company has also formed relationships with energy consultants to develop coverage that will replace damaged traditional buildings with leaner, greener constructions.

LEED as Green Proxy

The LEED certification system also rates buildings based on where they’re cited – giving low grades to buildings in sensitive marine and coastal environments.

“You can’t build on a flood plain, or on areas that have been designated as having endangered habitat,” says Bushnell.  “You also can’t build within 100 feet of wetlands … or within 50 feet of a body of water that is protected by the Clean Water Act.”

Selling the Win-Win

All of this adds up to massive energy savings down the road – and a massive reduction in greenhouse gas emissions.  For Bushnell, it’s a classic win-win, and that’s the pitch he believes NGOs should be making to industry.

“Can you tell private industry why it’s economically compelling for them to be involved with what you do?” he asked.  “The green building industry told us why it’s economically compelling for us and for our customers to be involved with them, and that’s why we’re doing it.

Cool Kids Club
Paul Holthus of World Ocean Council believes industry can be brought to the table by creating a sort of “cool kids’ club” of leading companies that embrace sustainable business practices – whether in shipping, fishing, offshore renewable, or even oil and gas.

“We all share one ocean ecosystem, but at this stage there is nothing that brings them together to think about and act together on that shared system,” he says.  “There is nothing that focuses them on the issues and challenges of managing the impact and achieving the proactive, constructive input into the future health and productivity of the ocean.”

He proposes the creation of a “leadership alliance” comprised only of companies that abide by certain rules.

Multiple Sectors; Multiple Services; One Ocean

He also warns against taking an approach that’s too narrow in an area as broad and deep as the ocean.

“The cross-cutting of issues – such as ocean noise, marine debris, etc – means that we need for these industries to create ‘common energy’ working together on this,” he says.  “Then we can engage with the climate-change community on blue carbon and creating a cross-sector approach that is able to work in a more coordinated fashion.”
For Jim Cannon of the Sustainable Fisheries Partnership (SFP), certification remains the most effective way to encourage industry involvement in sustainable fishing.  He points out that SFP certification now covers 65% of the seafood market in the UK, and that major restaurant chains like McDonalds are joining in as well.

“Our mission is to engage global seafood supply chains in the rebuilding of depleted fish stocks and reduction of environmental impact,” he says. “We work in ugly, bad, nasty fisheries that don’t want to make improvements, but we work in new ways now that we’ve gained some trust and credibility with the industry.”

One of those new ways involves going after buyers.

“If illegal fishermen are supplying that product into the international market, we can identify who it goes to, and we can start putting economic pressures on the bad actors to pull out,” he says, citing as an example how legal Russian fishermen benefited when Walmart, McDonald’s and Unilever broke their ties with those breaking the rules.

As the illegals dropped out, prices began to rise – and enforcement tightened even more.

“So how does this relate to payment to ecosystem services?” he asks.  “I believe the entire sustainable seafood market is a PES. What it means to buy sustainably means the target stocks is healthy, which means the underpinned environment supporting those stocks is healthy, and the bicatch is low, which means protective species are benefitting from reduced fishery methods.”

The Lesson: Hit the Buyers

“For those of you working in marine conservation and look to the fishing industry, you are looking in the wrong place,” he says. “The fishing industry isn’t usually a place where guys have a lot of money, but the global value of seafood sales is three to four times greater than the value of seafood landings.”

In a final presentation, Bettina von Hagen of the EcoTrust advised attendees at the meeting to be mindful of opportunities to “leverage funding and sympathetic players.” She cited one example in Oregon where by taking ownership of a relatively small plot of watershed property adjacent to a much larger area of publicly owned property, EcoTrust has been more effective at meeting biodiversity challenges and critical needs than if it had been working with just the isolated plot. Similarly, she said it is important to be mindful of regulatory changes, tax incentives and industry restructuring for opportunities to develop new markets.

She also called on ecosystem market designers to look for ways to assist distressed communities by showing them how to create jobs from new services to the natural resources that they have available.

“If your only currency is timber, you’re going to make certain choices that are not optimal, when you have a forest that produces this whole range of goods and services,” including carbon storage, habitat creation, salmon spawning, recreation and scenic attractions.

“You have to look for value in the most unexpected places,” von Hagen said.

Henry Teitelbaum is a London-based international financial journalist and author, most recently of The PFI Market Intelligence Report, PPP: Challenge and Opportunity After the Financial Crisis, which was published by Reuters in September 2009. He is reachable at Henry@P3Planet.com

Steve Zwick is Managing Editor of the Ecosystem Marketplace. He can be reached at SZwick@ecosystemmarketplace.com.

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